Regulations and Regulators Need Regulation

When it comes to regulating business conduct, nobody has got it right. Democrats habitually call for increased regulation, while Republicans consistently seek to reduce regulatory oversight. And as I see it, both Republicans and Democrats are wrong. What is needed is not more or less regulation, but more effective regulation.

It’s easy to see why. Regulation of business activity is important, both to protect the business leaders from hurting themselves and the consumers with whom their company does business. But the truth is, that kind of regulation is a lofty chimera. Neither U.S. House nor Senate can make it a reality.

Nothing bolsters that argument better than the financial turmoil of the past few years. The economic meltdown amply shows that the executives of even the largest corporations take self-destructive actions that not only damage or destroy their own companies, but also do great harm to the entire economy. Given the choice between making an extra buck or treating the customer fairly, the vast majority of companies will always opt for the money. Business leaders have clearly demonstrated time and again that they don’t have the capacity to regulate themselves when confronted with this simple money vs. fairness equation.

The devil of effective regulation in the details; that is, defining exactly what it means to regulate. One camp believes that when it comes to companies, all risk should be taken out of the decision process. Another camp believes the consumer is not capable of making intelligent buying decisions so the regulators should decide what is best for the consumer. Both of these approaches are wrong and are the reason why regulation has been so ineffective in the past.

What Regulations Should Accomplish

The objective of regulation should be to create a “level playing field.” No more, no less. A level playing field means that companies in the same industry have an honest opportunity to compete effectively against each other. A level playing field for the company and the consumer means that the buyer has truthful, factual information needed to make an informed decision.

Regulation has been ineffective because regulators rarely understand the concept of a “level playing field.” Instead, regulators take it upon themselves to make decisions for both the companies and the consumer. This approach only serves to stifle creativity and innovation among companies and limit the options available to the consumer. This happens when regulators attempt to impose rules that take all risk out of doing business and take it upon themselves to decide what is best for the consumer.

Some regulatory systems have, of course, been effective. After reckless actions by banks triggered The Great Depression of the 1930s, Congress passed the Glass-Steagall act. In effect, the regulations limited bankers to banking activity. It prohibited them from growing so large as to impact the economy if they made bad decisions and prohibited banks from participating in areas where they had no experience, i.e. insurance and investment banking. Under this regulatory system banks were able to grow and prosper and not one major bank failed during the next 60 years.

Then in 1999, at the aggressive behest of banks, Congress repealed the Glass-Steagall act. Less than a decade later, unencumbered by regulation and lacking the experience to compete on a level playing field against the insurance and investment community, banks once again became the catalyst for another financial meltdown.

Recently Congress has passed a new regulatory act for banks, but this may take regulation to the opposite extreme by preventing banks from being creative and innovative (not that bankers are all that creative) and limit the options of the consumer. President Obama has appointed Elizabeth Warren to head up something called the Bureau of Consumer Financial Protection, presumably designed to protect consumers doing business with banks.

Ms. Warren will oversee creation of rules to regulate banks, lenders and credit card companies. This is all well and good, but Ms Warren – a Harvard law professor – has a reputation as a hyperactive consumer advocate with an attitude that the consumer lacks the intelligence needed to make an informed decision. This way of thinking can be just as harmful to the objective of effective regulation as a regulator who favors the business side. Adopting a regulatory stance that makes decisions for the consumer limits options and hinders both the consumer and business.

What is needed is a regulatory system that does not insert itself directly into the business-consumer relationship – that is make decisions for either party – but rather stays neutral by allowing the companies to compete effectively against one another and assuring that the consumer has the information necessary to make an informed decision. This is called a level playing field. Can you imagine just how dull and static a basketball game would be if the referees were empowered to tell a team when it could shoot or when the player had to pass? Of if the referee had the power to tell a team when it had to be in man-to-man or zone defense. We would not accept this type of interference from referees in a basketball game, but that has been the attitude of regulators in business.

Of course, no regulation has proven to be even worse than bad regulation. The investment and mortgage industries are great examples of how much can run amok when there is limited or ineffective regulation. None of us would know the name “Madoff,” if the SEC had been effectively doing its job. If the investment community had been required to define and disclose the details of such things as “collateralized mortgage obligations,” “credit default swaps” and many other “investments” of their ilk, it is doubtful many would have been sold. Even more revealing would have been a requirement for the investment companies to admit that they didn’t understand what they were selling.

Regulations and regulators in business need to see themselves as referees, not participants. Regulators should act as referees that make the game fair for both sides. Their duty is to make sure the game is played within the rules, (rules that everyone knows) rule violators are penalized for their infractions and both teams have a chance to win the game based on their talent and effort.

And the Moral of the Story …

Effective regulation of business activity is desired and needed to protect both the companies and the consumer. Companies need a level playing field to compete against other companies. The consumer needs a level playing field in order to make informed buying decisions. Regulations that inhibit a company’s ability to create and innovate or hinder the options of the consumer always do more harm than good.

If the competitive field is level then companies are incented to be creative and innovative in order to compete. If regulation actually prevents such activity then only the biggest companies can prosper and the lowest common denominator becomes the standard of performance.

If there is a level playing field in the form transparency and full disclosure in the relationship between the company and the consumer, then the consumer will have the ability to make an informed decision. Such an environment will also challenge the company to be responsive to consumer needs and vastly expand the options available to the consumer.

Unless and until governments understand and implement regulations designed not to manage and control, but to create a level playing field for all involved, they will continue to be ineffective.

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Founder of LifeUSA Insurance and retired CEO of Allianz Life, N.A., Bob MacDonald regularly blogs with timely, hard-hitting comments on almost every business subject from entrepreneurism to better management, smart business leadership, government and politics, and of course, the life insurance industry.

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Bob MacDonald, founder of LifeUSA Insurance and retired CEO of Allianz Life, N.A., regularly blogs with timely, hard-hitting comments on almost every business subject from entrepreneurism to better
management, smart business leadership, government and politics, and of course, the life insurance industry.